Sears Holdings (SHLD)

The ever important margin question has to be posed here. How fast are margins actually shrinking at Sears? In fact gross margins declined by 1% to 27%. As the economy weakened in the United States, it became clearer that bigger ticket items would have a hard time generating sufficient demand. Sears noted its highest sales rate drops in items such as Home Appliances and Lawn and Garden items. With Sears sales down in the US by almost 10% and K-Mart sales down by 7% it brings up another question, can Lampert turn this around, or will the weakening economy further deteriorate Sears margins and in turn earnings (losses)?

It was during the difficult retail sales quarters in the past years that Lampert was able to keep the company generating profits by using the Holdings cash reserves seemingly as a large hedge fund, but with the current quarter in the books, Sears has swung to a loss. Sears posted a net loss of $56Million ($0.43/share). On the top line, Revenue fell almost 6% to $11.07Billion. Compared to expectations it does not paint a bright picture, as analysts were hoping Sears would deliver $11.4Billion in Revenues and a profit of $0.15/share.

As they say, 1 things for sure, 2 things for certain, Sears is struggling amidst a declining economic picture domestically, and secondly any plan that involves simply buying back more stock will not lead to sustainable turnaround in "core-business". Sears was "Suffering Retail Blues" back in its November quarter and nearly 6 months later, the picture hasn't gotten any clearer, and may have in fact, with this latest posted loss, gotten more polluted.

What's the plan for Kmart? Kmart has prices in excess of 19% higher than its competitors, and commands a significantly lower wallet share among its customers. Like the rest of the Sears franchise it has suffered from declining sales for years. It is doubtful that the company will be able to turn itself around.

The reports last week showed that in April there has been a precipitous slowing of revolving credit. It would have been better if we saw it slow at a more reasonable rate rather than what actually occurred. While that may seem to be a strange statement, the quick turnaround only provides evidence that consumers were, in large part, simply utilizing their governmental stimulus gifts for spending. Which is the point of it of course, but that is not going to last for long. So, any excitement should be tempered with a dose of reality.

The general trend for credit is still moving in the wrong direction and it is still providing evidence that the consumer is still struggling to pay for goods. This is clearly shown by the increase of $8.9 billion of consumer credit added in April. The main component of the increase is nonrevolving lines of credit that include durable goods. These are the same durable goods which have been slowing due to lack of consumer demand.

There is no need to over think this one. Pick any free standing Sears or K-Mart any where in the country that is not attached to a multi store mall. Any location that fits this criteria you find the same thing in common the parking lots are empty. Now, take the same geographic area and apply the same conditions to a Wal-Mart Target, Kohl's, Costco, Home Depot, or Lowes and you will not be able to find a parking space in any of them. Less and less people with less and less discretionary income = less and less EPS.

Sear's has invested a lot of time and energy into its Sear's Grand stores. These stores offer a larger variety of merchandise and better displays. The only problem is that these two items among others will undoubtedly increase operational expenses. Since Sears Grand is a discount store it can't raise its prices so margins must suffer.

Lampert may have a track record of unlocking short-term value in assets, but his ability to deliver long-term value is still unproven. Cost cutting can only go so far. While the company has made some gains declining sales continue to be the companies main problem. It is unclear that Lampert has any compelling solutions to this dilemma.